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An Overview of Dividend Investing

Dividends are regular cash payments that companies make to their shareholders, usually on a quarterly basis. Unlike capital gains from share price appreciation, dividend payments put cash directly into investors’ pockets.

Companies that pay dividends tend to be mature, established businesses with consistent profits and strong cash flows. These attributes allow them to regularly distribute a portion of earnings to shareholders. Here are some key benefits of dividend investing:

Passive income: Dividends provide a stream of income without having to sell any shares. This income can supplement other sources, like wages or social security.

Reinvestment: Dividend payments can be reinvested to compound returns over time through the power of compounding.

Inflation hedge: Dividend payouts often rise over time, helping income keep pace with inflation.

Downside protection: In falling markets, dividend stocks often hold value better than non-payers. The income cushions the stock price.

Reliability: Mature dividend payers often have durable competitive advantages and consistent profits. This supports dividend continuity.

For all these reasons, dividend stocks can provide the foundation for a low-risk, income-generating portfolio.

3 Long-Term Dividend Stocks to Buy and Hold Forever

Here are three dividend-paying blue chips that check all the boxes for stability, reliability, and income generation:

1. Bank of America (BAC)

Quarterly dividend yield: 3.35%
Consecutive years of dividend increases: 1
Payout ratio: 28% of earnings
Bank of America is one of the largest banks in the United States and a member of the elite Dow Jones Industrial Average. After slashing its dividend during the Great Recession, Bank of America has rebuilt its payout over the past decade.

The bank recently raised its quarterly dividend by 5% to $0.22 per share. This gives the stock a generous 3.35% yield, one of the highest in the banking sector. Bank of America only pays out 28% of its earnings in dividends, giving it plenty of room to continue increasing the payout.

As the U.S. economy continues expanding, Bank of America is well-positioned to benefit from higher interest rates, loan growth, and lower credit losses. The company has also invested heavily in technology to modernize its consumer and institutional banking businesses.

With its strong competitive position and renewed focus on rewarding shareholders, Bank of America checks all the right boxes for dividend investors. The stock provides income today while offering dividend growth potential for the long run.

2. Dow Inc. (DOW)

Quarterly dividend yield: 5.12%
Consecutive years of dividend increases: 1
Payout ratio: 45% of earnings
Dow Inc. was spun off from DowDuPont in 2019 and produces chemicals needed to manufacture consumer products like plastics, solvents, and adhesives. Dow operates in a steady, defensive industry and throws off plenty of cash to support dividends.

The company currently yields more than 5%, the second highest payout in the Dow Jones index. Dow pays a quarterly dividend of $0.70 per share and distributes 45% of its earnings in dividends. Management has committed to maintaining the dividend through this year’s potential economic downturn.

Dow Inc. recently invested $1 billion to expand polyethylene production capacity. Polyethylene is used extensively in food and medical packaging, demonstrating the essential nature of Dow’s products. The company also has exposure to faster-growing end markets like auto electrification, 5G networks, and green energy.

With its broad reach across diverse industries, Dow offers investors a compelling mix of yield and stability. The stock is ideal for income portfolios geared towards long investment horizons.

3. Texas Instruments (TXN)

Quarterly dividend yield: 3%
Consecutive years of dividend increases: 19
Payout ratio: 68% of free cash flow
Texas Instruments is one of the world’s largest semiconductor companies. It makes the analog and embedded chips that power electronics in sectors like automotive, personal electronics, and industrial machinery.

With roots dating back to 1930, Texas Instruments has paid dividends since 1962. It has raised its payout for 19 consecutive years at a stellar compound annual growth rate of 23%.

Texas Instruments stock currently yields 3% and delivers excellent dividend growth. The company generates predictable free cash flow exceeding $6 billion per year, enabling a healthy 68% payout ratio.

Management expects to return 100% of free cash flow to shareholders moving forward, split between dividends and share repurchases. With semiconductor demand forecasted to rise steadily, Texas Instruments should have no trouble continuing its dividend growth streak.

Key Takeaways

Here are the key points on why the above three stocks make excellent forever dividend holdings:

They operate in stable, defensive, and essential industries.

Each pays a high dividend yield of 3–5%.

Their payout ratios leave room for dividend growth over time.

Bank of America and Dow offer higher initial yields, while Texas Instruments provides greater growth potential.

All three have strong balance sheets and predictable cash flow generation to support their dividends.

For investors with long time horizons, buying shares of these dividend stalwarts can provide a lifetime of rising income. The compounding power of reinvesting their dividends can significantly boost total returns over decades of holding.

An Expert Opinion on Lifetime Dividend Investing

To conclude this article, here is some insight from Marc Lichtenfeld, dividend expert and editor of The Oxford Income Letter:

“Dividend growers bought at reasonable valuations and held for the long term provide investors with an opportunity to generate substantial income that continues to increase. They offer both solid starting yields and the potential for growth to combat inflation over time.”

Is Now a Good Time to Buy Dividend Stocks?

With stock market volatility high in 2022, some investors may be wondering if now is a prudent time to initiate positions in dividend stocks. Here are some factors to consider:

Many dividend payers have pulled back 15–30% from 52-week highs, increasing their starting yields.

Payout ratios remain healthy, with companies focused on maintaining dividend continuity.

The economy is expected to grow modestly in 2023, supporting corporate earnings.

Interest rates may limit further upside in valuations, but are not high enough to undermine demand for equities.

Dividend aristocrats with decades of payout growth have weathered far worse economic storms.

In summary, long-term investors can likely benefit from dollar-cost averaging into leading dividend payers at current levels. The stocks provide both income and growth potential as the market cycle evolves.

Frequently Asked Questions

What dividend yield is considered high?

A dividend yield above 4% is generally considered high. The S&P 500 Index currently yields around 1.6%. Any stocks yielding 4–6% or above can be attractive to income investors.

How often do dividend companies raise their payouts?

The most reliable dividend stocks aim to increase their payouts every year. Many follow a yearly tradition of announcing dividend hikes. Companies in stable industries tend to raise dividends the most consistently.

What is the benefit of a company with a long dividend growth streak?

Extremely long dividend growth streaks display a strong corporate culture committed to paying shareholders. 20+ year streaks indicate a company has consistently increased dividends through good times and bad.

Are dividend stocks safe for retirees?

Dividend stocks tend to be less volatile than non-payers. This makes them especially suitable for investors living off portfolio income in retirement. Focus on established companies with durable competitive advantages and long payout histories.

How much income can dividend stocks generate?

At current yields, a $500,000 portfolio of dividend stocks could generate $15,000 — $25,000 per year in dividend income. This income could sufficiently replace or supplement other retirement income sources for many investors.

What are the tax implications of dividend stocks?

Qualified dividends are taxed at long-term capital gains rates, which are lower than ordinary income tax rates. This favorable tax treatment enhances the appeal of dividend stocks for investors in taxable accounts.